Text book problems: Chapter 12 Problem 12-9 page 429 Fundamentals of Financial Management 14th Edition

New Project Analysis: You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,500 increase in net operating working capital (increased inventory less increased accounts payable).There would be no effect on revenues, but pretax labor costs would decline by $44,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also the firm spent $5,000 last year investigating the feasibility of using the machine.

a) How should the $5,000 spent last year be handled?

b) What is the initial investment outlay for the machine for capital budgeting purposes, that is what is the Year 0 project cash flow?

c) What are the project`s annual cash flows during Years 1,2, and 3?

d) Should the machine be purchased? Explain your answer.